Ukrainian holdings - not best time to develop cardinally new projects

The previouslyannounced plans for development made by made agricultural holdings, became the task beyond its strength. In terms of the political and, as a consequence, economical instability, the holdings reviewed their investment programs. Also, some foreign investors deny to do business in Ukraine.

Course to cost optimization

According to Ihor Petrashko, Deputy General Director of the company UkrLandFarming, the holding adjusted downwards its investment plans for 2014, due to the unstable political and economic situation in the country. Previously the company announced on the planned investments at the level of 400-600 mln USD, but in the current year the expected volume of investments is not more than 200 mln USD. But it does not mean that the company will stop the projects: if foreign banks resume cooperation programs, UkrLandFarming may overtake the previous plans until the end of the year, said I.Petrashko.

UkrLandFarming has not yet found a partner for construction of the grain terminal in the port Yuzhny (Odessa oblast), where previously Oleg Bakhmatyuk, owner of the holding, purchased the land lot for future construction. After the global trader Cargill purchased its share in the company, there appeared the chance of joint construction of the terminal, but on the basis of recent statements of I.Petrashko, we can conclude that cooperation in the sphere failed. The company continues looking for new investors.

Also, SergiiMazin, General Director of the company KSG Agro, declared on cessation of investment projects. According to him, the company decided to pause the planned investments for the current year. Their sum should have reached 54 mln USD, informed S.Mazin in the interview to one of Polish magazines. The company KSG Agro does not plan to increase its land bank in the current year. To date the areas total 96 thsd ha, although the previous plans for expanding in 2014 totaled nearly 120 thsd ha. Also, KSG Agro refused to expand the pig complex, which first phase of construction is already completed. In addition, due to call-back of the contract for the supply of pellets to the Polish partner – the company Polish Energy Partners, which previously contracted 80% of the general production volumes of pellets, the agricultural holding was forced to stop construction of the plant for production of medick pellets, and launch of the plant for production of fuel pellets.

Also, the company Kernel in conjunction with the US Seaboard Food, postponed for a rainy day the most large-scale pig breeding project at the cost of 700 mln USD, which the company previously announced. At the same time, Kernel continues actively investing in development of the grain logistics: the company plans to invest 200 mln USD to construction of the complex for storage and processing of grains and oilseeds during the following 2 years. Such decision is quite understandable: the pig business is not for the main activity of the company, as opposed to crop production. And it is the best time for development of radically new projects.

Svarog West Group delayed the previously announced construction of new agricultural objects, due to difficult economic conditions in the country. According to Inna Meteleva, Deputy Chairman of the Corporation, the company postponed plans to build new objects, particularly dairy farms, new storage facilities for grains and oilseeds, fruits. According to her, the company closely reviewed all positions of the business plan. And in the current year the company will focus on strengthening of the existing capacities. Though, I.Meteleva did not specify the expected sum of investments. I.Meteleva called the rising costs for basic resources of agricultural production in the country due to exchange rate shock, as the major reason for such business activity. However, the Deputy Chairman noted that in terms of rather favorable location and reasonable price, Svarog West Group is ready to consider purchasing of a new asset.

Also, foreign investors revise their investment plans, except for the abovementioned agricultural giants. Despite the fact that the pork market in Ukraine is deficit-plagued, pig breeders from Russia and Germany, who previously planned to develop its business in Ukraine, also started closing its plans. Thus, the subsidiary company of BEZRK-Belgrankorm, based in Russia, postponed its plans to expand the production capacities from 10 thsd tonnes of pork per year to 25 thsd tonnes. The company estimated its investments to the project at 10 mln EUR.

The project of the Ukrainian subsidiary company of HAKA planen.bauen GmbH, based in Germany, also remained unrealized. The investors decided to cancel investments at the level of nearly 10 mln EUR for construction of the pig complex with the capacity of 30 thsd heads per year. According to Ihor Konarev, Chief veterinarian of Haka.UA.Svinokompleksy Poltava, the investors are waiting for better times.

Crimean doubts

The current uncertainty with the Crimean asset provides the stagnating effect on development of agricultural business in the region, said managers of agricultural companies. I.Petrashko reported that UkrLandFarming owns 12 thsd ha of agricultural lands on the peninsula, which mainly deal with rice growing. At the same time, due to the observed difficulties with water supply to the Crimea, it is not known whether there is any possible harvest throughout the reporting areas. UkrLandFarming has two poultry farms in the Crimea, but the company did not start new cycles there. The company stopped any activity at the enterprises, until it becomes clear how Ukraine reacts at work of the enterprises in the Crimea, I.Petrashko added. Also, re-registration of the Crimean lands in accordance with the Russian legislation is not moving yet.

According to S.Mazin, KSG Agro is ready to abandon its Crimean assets. The company tries to minimize its operational risks in the Crimea. The planted areas of winter crops at the peninsula total 14 thsd ha, and the company will try to get the best results from the areas, he said. S.Mazin announced the company's decision to plant sunflower seed throughout 2.2 thsd ha of the reporting areas, the remaining land will remain out of crop. The company fails to forecast whether the water supply for the Crimea is available in the future, and what its cost will be. There is a risk that the high cost of expendable material will make the crops as lossmaking, said the top-manager of KSG Agro. He noted that the business decisions related to the assets held in the Crimea may be quite different: either to continue working in this region, or selling the enterprises.

Prospects

According to Yury Shved, Director of the Department of transaction support and business restructuring of KPMG in Ukraine, to date expect the country should not expect for increasing of investor interest in Ukrainian capital next year or two. According to him, the Eurobond market will open no earlier than in the autumn 2014, primarily due to the country risks. At the same time, the conditions of financing (cost) are unlikely to change. The additional risk factor includes fairly high level of the current debt load of large-scale agricultural companies in Ukraine. Also, to date there is no clear prospect of resumption of the demand for purchasing of shares of Ukrainian agricultural holdings during the IPO/SPO, due to several reasons: the country risk, weakness of the international market of agricultural IPO in general, and meeting the demand for Ukrainian agricultural assets in the past in particular; poor indices of prices for shares of the listed companies; unavailability of the holdings themselves.

Y.Shved noted that there is the certain demand for continuation of the consolidation of land banks by large-scale Ukrainian players, which can become the key driver of the M&A market in the agricultural sector in the coming years.

According to the expert, in 2014-2015 potential investors will keep their interest in the allied sectors of the agricultural sector in Ukraine: the elevator business; port transshipment; agricultural machine engineering (primarily the technical equipment for elevators); bioenergetics (due to the presence of opportunities for target financing and the existing negative expectations on energy products cost).

S.Mazin, General Director of KSG Agro, expects that cooperation of Ukraine with the IMF will stabilize the situation, and some investors will gradually return to Ukraine. In turn, I.Petrashko said that exchange rate fluctuations have a different effect on the export plant growing direction and export livestock direction of the agribusiness. In the grain market segment the fluctuations had a negative impact on the planting campaign, but in general, the impact will become positive in terms of absence of the ban on grain exports. In the egg production sector the devaluation had a negative effect, as 75% of the sales are realized on the domestic market, I.Petrashko analyzed the possible consequences of devaluation for the holding. According to him, UkrLandFarming plans to keep the egg production volumes at the current level, and deny from the expansion plans.